It’s time to move to genuine carbon emissions trading

Over the weekend, there has been widespread reporting that returned prime minister Kevin Rudd is contemplating moving the carbon price from a fixed price to floating price for emissions permits.

The Age reported that it was expected that the carbon price would be a priority item for discussion at the next cabinet meeting:

Speculation is growing the newly reinstalled Prime Minister will dump the fixed carbon price in favour of an earlier transition to an emissions trading scheme, with two ministers indicating on Friday that carbon pricing will be a priority at the first meeting of a new Rudd cabinet.

The effect of moving from a fixed price to a genuine emissions trading scheme would be for the price of carbon emission permits to fall, and fall significantly.

Currently, emissions permits are fixed just above $23. This price is fixed until 1 July 2015, when it would become a floating price — that is, a price determined by supply and demand.

The current cost per tonne in Europe for carbon emissions permits is around 3 euroes (approximately $4 in Australia). The price fell sharply in recent years due to the effects of the global financial crisis, and because big polluters received substantial numbers of free permits. This oversupply, followed by a decline in economic activity accounts for the majority of the price decline, according to University of Melbourne research associate Katherine Lake.

Australia followed the path of Europe by giving away significant numbers of free permits. Furthermore, the impact on future budgets was locked in through the decision to front-load compensation to taxpayers and businesses. That is, people got carbon price compensation before the income came in from the scheme.

The added complication was our fixed price. In the middle price-range, it has succeeded in seeing around a 30% increase in renewable energy production and significant reduction in carbon emissions.

Australia should dump the fixed price and move to a full trading scheme. To avoid the mistakes of the European scheme, rather than using fixed prices, we should rely on scarcity to drive up the price and encourage the big polluters to innovate and reduce emissions.

Kevin Rudd can also underscore his commitment to taking action on climate change by ramping up investment in clean, renewable energy projects, and expand the existing programmes that are in the system that assist households increase energy efficiency.

More broadly, Rudd could halt some controversial coal and unconventional fossil fuel projects that are being planned, which would also assist Australia’s action on keeping temperature rise to below 2 degrees Celsius. Tied to this, Rudd could reduce fossil fuel subsidies, which amounts to tax-payer subsidised funding of carbon pollution. This could help Australia avoid the coal bubble that would lock in catastrophic global warming. A report by Centre for Naval Analysis states (with respect to fossil fuel investment in the USA):

Using more natural gas and oil, even if domestically produced, neither frees our economies from global oil prices nor checks the greenhouse gas emissions that threaten future generations. The only sustainable solution to this dual challenge is to improve our energy efficiency and diversify our energy sources to include cleaner and renewable power.

The carbon price is an important tool, but it is by no means the only one that the government has. The renewable energy target is by far the most effective way Australia to reduce its emissions in the short term.